Stamp duty should head Letwin's list

By George Trefgarne

12:01AM BST 27 Sep 2004

Oliver Letwin is redeeming himself. There is no point denying that his first major speech as shadow chancellor in January was a disaster.

Despite the widespread clamour for lower taxes and the growing outrage at the level of wasteful public spending by the Blair Government, Mr Letwin said the Conservatives would actually spend more than Labour on health and education, before trimming overall spending slightly by 2011.

As he brandished his charts and numbers, the central message that many of us hoped for - that the Tories would reduce the burden of government and hence cut taxes, was lost.

Since then, Mr Letwin has been beavering away and, with the help of David James, the businessman once brought in by Mr Blair to sort out the Dome, has either modified or clarified his strategy.

Thank goodness for Mr James, I say. Gordon Brown is planning to spend over £1.5 billion a day and Mr James has looked into the matter and discovered - you guessed it - more waste than at a Roman orgy.

With a bit of luck, the Tories should be able to offer meaningful tax cuts in their election manifesto and Mr Letwin will be forgiven his initial manoeuvring.

Who cares what the Tories are doing in the week of the Labour conference, you might ask? The reason is that Gordon Brown's reputation as a prudent chancellor is in tatters. The economy may still be growing and unemployment at a 30-year low, but it is an odd, sickly sort of prosperity, laced with poison.

Millions of people face poverty in retirement, thanks to Mr Brown's attack on pensions; there have been more than 60 tax rises, driving up the true level of inflation; and Mr Brown's public spending boom has delivered very poor value for money.

There is a terrible feeling in the pit of Middle England's stomach that a Labour third term will be an economic disaster.

The issue for Mr Letwin now becomes not whether to cut taxes, but which ones. Apparently, he has inheritance tax in his sights. The surge in house prices has driven vast swathes of the country into the inheritance tax pen, an enclosure originally intended only for the very rich.

But the solution to this seems pretty obvious to me. If Mr Letwin just cut inheritance tax to 10 per cent on all estates, he would actually reduce the rate substantially from 40 per cent while actually achieving the paradoxical effect of raising more revenue, as avoidance would fall dramatically.

Ergo, cutting inheritance tax does not really count as a tax cut, as it will not actually reduce the amount of money harvested by the Government.

A far better and more genuine reform would be to abolish stamp duty, the most wicked tax in a fiercely competitive field. When William III introduced this levy on legal documents in 1694, it looked like a perfect tax, which is to say low, compulsory, and temporary.

Parliament passed an Act "Granting to their Majesties several duties on Vellum, Parchment and paper for four years towards carrying on the war against France".

But it was so easy to collect that stamp duty soon spread to post-horses, hats, hair powder, newspapers and medicine labels. When it was imposed on tea imports in America, it helped ignite a rebellion that cost us the loyalty of our second-best colony (after India).

Now stamp duty is only levied on share trading and house and land purchases. But it is steadily becoming just as politically explosive as it was when those brave men tipped bundles of tea into Boston harbour. For its perverse effects are being exposed, first by the decline in house prices, and second by the weakness of the stock market.

According to the Halifax, house prices dropped for the first time in four years in August and, in its latest minutes, the Monetary Policy Committee of the Bank of England said: "An increasing weight of evidence suggests that the housing market might be cooling, with a range of indicators pointing in the same direction.

" But the argument for the penal level of stamp duty on house purchases (which, thanks to Mr Brown's stealthy increases, is three per cent on a house worth over a quarter of a million pounds and four per cent on one worth half a million or more) is that soaring property prices will, in effect, pay the duty for you.

It therefore follows that a declining property market will expose just how hateful this tax is. For it falls heavily on the very class politicians should be encouraging: young couples hoping to set up a home together.

It is the only tax that must be paid by borrowing; or, alternatively, a raid into a couple's modest capital. Parents and grandparents frequently have to pass the hat round to help.

Those who want to climb the property ladder, by moving several times, get clobbered repeatedly. It distorts prices. And it penalises movement in the labour force. According to his own forecasts, Mr Brown will soon be raising more than £9 billion from stamp duty, twice the amount when he took office.

The situation is no better in the stock market. Stamp duty on share trading in Britain, at 0.5 per cent, is the highest in the developed world. It is mostly paid by pension funds, for other professional investors are adept at avoiding this absurd impost by trading derivatives, on which no stamp duty is payable.

This growth in avoidance means stamp duty revenues from share trading are now falling well short of Treasury expectations. Mr Letwin must say it loud, and say it clear: the Tories should promise to abolish stamp duty completely and finally to close the Stamp Office 307 years after it was first meant to be shut. If William III could see how his baby has mutated into such a monster, I am sure he would approve.